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On Our Radar

Does Traditional Investment Advice Match The Times?

With an ever-changing market, countries going into default, and credit as our parents knew it unrecognizable in today’s world, traditional investment advice just doesn’t allow people to enjoy their maximum retirement income. For the purposes of this article, maximum retirement income means that we save a significant amount of money in wealth-building tools, such as Indexed Universal Life Insurance and Fixed Indexed Annuities, that are guaranteed never to go backwards and can be taken out Tax-Free--even if the stock market crashes 50% or more like it did from 2007-2009.This definition would also include a strategy that pays a guaranteed rate of return (accumulation value) and a lifetime income you can never outlive.

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Does traditional investment advice keep up with the times to develop Maximum Retirement Income?

1) CDs are typically used as an investment tool; however, they provide very low yields. They also use taxable income and may not keep up with inflation.

2) In the past, real estate has not been a bad investment unless one purchased the asset for appreciation only. Counting on real estate to appreciate is nothing but luck; there is no guarantee that it will go up in value, nor is there any guaranteed income from this type of investment, and any income gained from real estate investment is also susceptible to taxes. In addition, there are many risks, such as rent control, associated with using real estate as a means of retirement income.

3) Bonds have been an okay investment, however the returns and income are not guaranteed. The long-term returns for the average investor have not been very good.

4) Unfortunately, many people have lost a majority of their retirement savings in stocks and mutual funds the past 10 years. Millions of Americans are directed to buy a “proper mix,” (diversification), of stocks and mutual funds to create and maintain maximum retirement income. Again, with stocks and mutual funds, there is no guarantee of income, and what is taken out is taxed.

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I recently had a conversation with a friend and business associate of mine named Jim, a former CFO and now a retiree. As we sat together, Jim reflected on the importance of planning for the future and the difficulty of accomplishing that task. We agreed that our current choices of 401(k) and IRAs, could be good investments, yet they lack stability to acquire future positive results--there’s no guarantee. His current retirement situation reflects that of many retired individuals: he has insufficient funds to support his present or desired lifestyle, primarily due to negative fluctuations and downturns in the equity or stock markets, not to mention tax regulations and inflation that impact these funds upon withdrawal. Once investments decline or lose momentum for any reason, it becomes very difficult to recover those losses. It’s like being in a bicycle race. The racers all start out even; then you approach the first hill to climb. Perhaps a gear catches, and you begin to fall behind, further and further. You can see the others ahead of you, but know that not only will you have to peddle the same speed as those ahead of you--you’ll have to peddle much faster just to catch up. And it may actually be impossible to catch up with the other racers, depending on the time remaining and the distance you have fallen behind. You have lost your momentum. What a difficult position to be in. You trained and gave your all, but it wasn’t good enough. The race was a struggle.

Just like in the bicycle race I just described, we can fall behind with the money we put into stocks or mutual funds. We all know there is no guarantee that the money you’ve invested will increase to the extent you had originally planned. Some say that putting our money in stocks or mutual funds is nothing but luck, and I tend to agree with them; my own 401k was a great example of this. In order to avoid losing momentum and relying on luck for your future retirement, Jim and I agreed that a “TAX-FREE” strategy needs to be considered. Developing a tax-free plan is the single most powerful tool we have today for maximizing our retirement income, particularly in conjunction with other tax-deferred and taxed income. Let’s not be fooled or led astray by those who might insist that we do not need tax-free money--we should all include those monies in our plan.

Life has many twists and turns, and as hard as we try to navigate through difficult situations, be they financial or physical, the traditional retirement strategies often fall short. We all know we have very little control over these vehicles. Even if we “diversify” as we are advised to do, timing becomes a factor in order to grow, protect and preserve our money. When we start saving for retirement, it is very important to keep the momentum moving forward. Any loss in any year will change our future financial outcome, and we may end up with nothing. There is no guarantee when we put our money into our employer’s plan that we will have it when we need it. Naturally, the longer you wait to start, the less you will have.

The term “lifestyle” has come up a lot in this discussion. At retirement, your lifestyle does not have to diminish, as some people would like you to believe. We want to continue living as we have during our working careers; therefore, a reduction in income is not an acceptable option at retirement. Our tax liability may go up rather than down as a result of fewer deductions: grown children are out of the house, and mortgages are—hopefully—paid off. That being said, one of the best ways to prevent this perplexing problem is to use a “TAX-FREE RETIREMENT” strategy first, then use tax-deferred strategies.

What, exactly, is “TAX-FREE RETIREMENT”? How does it work? First, you must determine how much money you would like to receive at your retirement. Let’s say you would like $100,000 annually. An insurance-enhanced plan can be designed where one can contribute a specified amount of money for a specified number of years (anywhere from 15 to 20) then stop contributing. That money will grow and compound at various rates of return up to a maximum rate per year, and it will never go backwards, lose momentum or lose your principal. As inflation and taxes are the biggest threat to our financial future, we need to have some of our money in a strategy where we will never lose any of it and can take it out tax-free for the rest of our life. If done properly, we will have maximum retirement income: income that is Tax-Free and can never be outlived. What is not used is left as a legacy to family or charity. Traditional investment advice can’t promise half of these features—the time has come to abandon outdated methods of protecting one’s retirement income and adopt a tested, insurance-enhanced method that can guarantee your maximum retirement income.

For more from Tim Hensley at The Hensley Group, or for questions about this article, Tim can be reached at tim@hensleygroup.org